What Happens When You Let AI Do Your Audit Defense
AI is everywhere right now. People are using it to draft emails, do research, plan meals, and yes, handle their taxes. For straightforward questions, it can be genuinely useful. But a recent Tax Court case is a good reminder that useful and reliable are not the same thing.
The case is Clinco v. Commissioner, T.C. Memo. 2026-16. What makes it worth paying attention to is not just that the taxpayer lost, but how he lost and who he was.
What Happened in Clinco v. Commissioner
Peter Clinco was a practicing attorney who also owned a restaurant. He knew his way around a legal filing. His 2015 tax return was audited by the IRS, which found nearly $2.3 million in discrepancies. Three separate issues came up during his defense, and all three went against him.
| Issue | Why It Was A Problem |
| Unreported Income | The IRS pulled third-party records from vendors and they did not match what was reported on the tax returns. He had no way to account for the gap, and no way to prove reported cash income. |
| Undocumented Depreciation | Clinco claimed $56,798 in depreciation across two properties and had nothing to back it up. No invoices, no closing documents, no records of any kind. He pointed to the fact that the same deduction was not questioned on his 2017 return, but the court did not buy it – what happened in a different tax year has no bearing on whether you can support a deduction in the year being audited. |
| Fake Case Citations | When Clinco’s attorney challenged the IRS notice, the brief cited several court cases to support the argument. Judge Holmes looked every one of them up. They were not real. The judge said the mix of case names, citations, and legal propositions looked like something generated by AI, and he put it plainly in the opinion: submitting fictitious case law to the court is a path to sanctions. |
Clinco also argued that the restaurant never turned a profit, hoping that would help his case. The court addressed that directly: a business losing money does not mean it cannot also have unreported income. The deficiencies were upheld.
Why AI Alone Is Not a Tax Strategy
Using AI for research is fine. A lot of people are using it, and it can help you get oriented on a topic quickly. The problem comes when the output does not get verified before it is acted on. AI produces answers that read as confident and complete, whether or not they are accurate. There is no disclaimer attached when it generates a court case that does not exist.
Clinco was an attorney. He presumably knew how to read a legal brief. And still, fictitious citations made it in front of a judge. That should give anyone pause before relying on AI output for something with real financial or legal consequences.
Bottom line – when the stakes are high, you need a professional to verify AI output.
A CPA brings things to an audit or tax situation that AI cannot:
- They know what the IRS actually expects to see and can identify missing documentation before it becomes a problem.
- They have worked through audits before and understand where the pressure points are.
- They can verify that any research, references, or citations are accurate before anything gets submitted.
- They can represent you, respond on your behalf, and stand behind their work with their license.
AI is a useful starting point for a lot of things. For taxes and legal matters, it needs a qualified professional behind it, every time.
Conclusion
Clinco v. Commissioner is not a story about someone who was careless with their taxes in general. It is a story about what happens when AI output goes unchecked in a high-stakes setting. Clinco and his representation were legal professionals and still failed the audit.
If this case made you think about your own records or whether your tax situation has been handled the way it should be, that is worth following up on. Reach out, and we can talk through it.
Frequently Asked Questions
- Is it okay to use AI to help with my taxes?
- It can be a helpful starting point for understanding a concept or doing some background research. The issue is when someone takes what it produces and runs with it without checking it first. AI does not know your situation, it does not always get things right, and there is no one on the other end of it who is accountable if something goes wrong.
- What kind of documentation does the IRS expect for deductions?
- It varies depending on what you are deducting, but the IRS generally wants records that show what you spent, when, and why. For depreciation specifically, that means things like purchase records and closing statements that establish your basis and when the property was placed in service. A lot of people assume that if a deduction was taken in a prior year without issue, they are covered going forward. That is not how it works. Each year stands on its own.
- What happens if inaccurate citations are submitted to the Tax Court?
- The court checks them, and your credibility is lost. That is exactly what happened in this case. The judge looked up every case referenced in the brief and found that none of them were real. Submitting fictitious citations is not just an embarrassing mistake. The court has the authority to sanction attorneys for it, and Judge Holmes made clear that it is not something the court takes lightly.
Continue Reading
- When AI Goes to Tax Court and Loses
- Tax Mistakes Real Estate Investors Make (And How to Avoid Them)
- Cost Segregation After Year End: Why December 31 Isn’t the Deadline
- Three Safe Harbor Rules Every Real Estate Investor Should Know
- Tangible Property Regulations and the De Minimis Safe Harbor: A Real Estate Investor’s Guide
